How to invest in rental properties like a pro
Investing in rental properties can be a lucrative venture. It offers both short-term returns and long-term wealth building, and it’s a smart way to add passive income to your overall portfolio. Rental properties are generally inflation-resistant and not quite as volatile as stocks. However, it's not without its challenges and risks. So, before you get started, it’s important to do your research. Understanding the investment property landscape, along with your objectives and goals, is key to your long-term success.
Knowing how to accurately evaluate properties, manage them efficiently and effectively grow your income will better prepare you to become a successful investment property owner for the long haul.
Choosing loan options that best fit your goals
The type of financing you choose to fund your investment property will have a big impact on your risk versus reward. Fully understanding your loan options will be a smart step in the right direction. For decisions like these, it’s usually best to define your goals, do your research and then decide which option fits your needs.
Here are a few ways to get the most bang for your buck.
MaxInvest*
Our MaxInvest loan program is designed to help any buyer who’s investing in property by making the process smoother and the terms more favorable. MaxInvest offers a streamlined approval process that could put the keys in your hands — and rental income in your pocket — incredibly fast.
Cash-out refinancing**
This option is a smart way to turn your home’s equity into a down payment on your investment property. It allows you to access cash quickly by borrowing against your home’s equity.
HELOC***
One of the biggest advantages of owning a home is the ability to access its equity. Tapping into your equity gives you an open line of revolving credit that you can use for your investment properties. Our HELOC (Home Equity Line of Credit) allows you to access your equity as a line of credit to pull from whenever you need it.
How to evaluate properties
Understanding how to accurately tell the difference between a good property and one to avoid is critical to growing a profitable investment portfolio. Start by looking for properties that match your budget and investment goals. Consider factors like location, neighborhood quality, property condition, rental potential and amenities. A property with good access to transportation and schools tends to attract tenants more easily. It’s important to know the vacancy rates and predicted growth of the area, along with the common property rule investors follow, called the 1% Rule. The rule states that your property should be able to rent for at least one percent of the total value of the property.
If all of this seems overwhelming, don’t worry. Correctly evaluating properties is a skill you learn. As you continue your journey, it makes sense to choose experienced partners like real estate agents who understand each aspect of the buying process and can help guide you along the way.
Managing properties
Once you’ve purchased your property, it’s time to decide how you’ll manage it. Unlike other investments, while the income might be passive, the management of the actual property will not be. If you have multiple properties, you might want to consider a property management company. If you don’t have the experience, time and trusted vendor list to properly manage them by yourself, it could be more than just a pain - it could cost you revenue. Choosing to hire a property management company can create time and money-saving-efficiencies over the life of your investment.
Owners who choose to manage their own properties generally deal with higher vacancy rates, poor tenants due to lack of screening and lower revenue because of unexpected overhead and more****. If you decide to self-manage, prepare for responsibilities like tenant interviews, rent collection, maintenance and emergency repairs.
Ways to turn a profit on your property
Choosing the rental properties that best fit your goals is essential to reaching your overall investment objectives.
Short term vs long term rentals
Short-term rentals often command higher nightly rates, especially in popular tourist destinations or during peak seasons. With a smart marketing strategy, you can attract travelers and maximize occupancy rates, leading to increased rental income. However, short-term rentals require more active management and may be subject to local regulations and zoning restrictions. Ultimately, short term rentals may provide higher income but will require more time and energy. Long-term rentals can provide steady income since they generally offer longer leases and allow your properties to appreciate. Long-term may bring in lower income but can provide stability to your investment property goals. The downside of longer-term rentals is extended vacancies, lack of liquidity and maintenance and repairs.
Single-family
As a stand-alone property that generally accommodates one family, a single-family property is relatively easy to manage and has a low vacancy rate. Due to higher costs, however, any vacancies can considerably affect your cash flow.
Small multi-family buildings
Small multi-family buildings such as duplexes and triplexes, feature connected walls, unlike single-family homes. These properties offer several revenue streams and can provide much more income than a single family.
Large multi-family properties
These properties are generally apartment buildings, townhouses or high-rises, and much like the small multi-family, these structures can provide higher revenues.
Vacation rentals
Designed for short-stay travelers, these can be single or multi-unit buildings. It’s important to note that revenue can be seasonal, dependent on location and you could face some competition in signing renters. However, since they’re rented on a weekly basis, revenue can be higher.
Commercial properties
Focused solely on businesses, these can provide higher revenues and longer lease terms. However, market fluctuations can have an outsized impact. Also, the startup costs to secure these are much higher.
Conclusion
Investing in rental properties can be a great way to build wealth and generate passive income. But before you begin, be sure to do your homework and define your goals — and once you’ve started, stick to your budget. Following these basic rules will increase your chances of a rewarding venture.
*Eligible for fully amortizing fixed rate and adjustable rate mortgage (ARM) financing on non-owner occupied properties as a purchase, rate and term or cash out refinance. Additional loan and property type restrictions apply. Max loan amount $2M, minimum down payment starting at 20%. FICO score and debit to income requirements apply. Optional Prepayment and partial prepayment penalties may apply where permitted by state and federal law and will be determined via a stepdown fee structure. Applicant subject to credit and underwriting approval. Restrictions apply. For more information about prepayment penalties go to: www.rate.com/resources/prepayment-penalty
**Using funds from a Cash-out Refinance to consolidate debt may result in the debt taking longer to pay off as it will be combined with borrower’s mortgage principle amount and will be paid off over the full loan term. Contact Rate for more information.
***Rate home equity line of credit (HELOC) is an open-end product where the full loan amount (minus the origination fee) will be 100% drawn at the time of origination. The initial amount funded at origination will be based on a fixed rate; however, this product contains an additional draw feature. As the borrower repays the balance on the line, the borrower may make additional draws during the draw period. If the borrower elects to make an additional draw, the interest rate for that draw will be set as of the date of the draw and will be based on an Index, which is the Prime Rate published in the Wall Street Journal for the calendar month preceding the date of the additional draw, plus a fixed margin. Accordingly, the fixed rate for any additional draw may be higher than the fixed rate for the initial draw. This product is currently not offered in the states of New York, Kentucky, West Virginia, Delaware and Maryland. The HELOC requires you to pledge your home as collateral, and you could lose your home if you fail to repay. Borrowers must meet minimum lender requirements in order to be eligible for financing. Available for primary, second homes and investment properties only. Dependent on minimum credit score and debt-to-income requirements. Occupancy status, lien position and credit score are all factors to determine your rate and max available loan amount. Not all applicants will be approved. Applicants subject to credit and underwriting approval. Contact Rate for more information and to discuss your individual circumstances. Restrictions Apply.
****Source: www.poplarhomes.com/real-estate-investment/building-a-rental-property-portfolio-the-ultimate-guide/